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Feasibility of Hedging Milk Input Costs for a Dairy Processor: A Case Study

Author

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  • Maynard, Leigh J.

Abstract

This case study evaluates milk input price-risk management strategies for a processor of refrigerated dairy products. The firm perceives price risk both when milk costs are over budget and when budgets are too conservative. Price-forecast­ ing models produced mean absolute percentage errors of sic to nine percent. Ina 2000-2008 simulation, hedging with Class ID milk futures reduced the variance of budget deviations by only 31 percent, while hedging with call options produced a similar cost profile with more predictable cash-flow requirements. Recommendations include using the price-forecasting models to improve budgeting accuracy but delaying the launch of a hedging program.

Suggested Citation

  • Maynard, Leigh J., 2009. "Feasibility of Hedging Milk Input Costs for a Dairy Processor: A Case Study," Journal of Food Distribution Research, Food Distribution Research Society, vol. 40(1), pages 1-16, March.
    • Handle: RePEc:ags:jlofdr:162128
    DOI: 10.22004/ag.econ.162128
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    Cited by:

    1. Charlebois, Sylvain, 2016. "Policy-change Triggered Environmental Uncertainty in a Dairy Cooperative: The Case of Mila in South Tyrol," International Journal on Food System Dynamics, International Center for Management, Communication, and Research, vol. 7(3), pages 1-13, July.

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